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A company purchases 5,000 units per quarter at an even rate throughout the year. Each order placed with the supplier incurs a delivery charge of £20. The annual cost of holding one unit in inventory is £5.
What is the minimum total of the inventory costs (order costs plus holding costs) per year?
The answer should be £2000 but I cannot get it
Thank you for your help
you need to use EOQ formula to find out optimal order amount:
EOQ= [2*20*5000*4/5]*(0,5)=400 units per order.
number of orders = 5000*4/400=50
average inventory would be 400/2=200 units.
re-order costs in this case amount to 50*20=1000$.
holding costs are 200*5=1000$
total min inv costs are 1000+1000=2000$.
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